Riding the wave of new revenue streams

NEW YORK—Pop-up venues in the lobby. Inventive F&B experiences. A curated collection of local items for sale in the gift shop or minibar. A bowling alley in the basement. There are myriad ways hotels can add incremental revenue these days, and brands, owners and operators are exploring these avenues. What’s next? What’s hot? What should hotels absolutely avoid in order to prevent commoditizing their experiences? These were but a few of the topics at the latest Hotel Business Executive Roundtable, “Riding the Wave of New Revenue Streams,” which was hosted and sponsored by The Wall Street Journal and moderated by Stefani C. O’Connor, executive news editor and managing editor of roundtables.

Robert Mandelbaum, director, research information services, CBRE/CBRE Hotels’ Americas Research, set the scene for attendees. “A lot of it is the story that you know—coming out of the last industry recession, revenue has been driven primarily by growth in rooms revenue, the strong comeback in demand and, eventually, ADR growth,” he said. “The struggle has been with costs within the rooms department. Despite the strong growth in rooms revenue, mostly due to labor costs, the rooms department profit margins are still less than they were pre-recession. Going into the F&B department, what’s lagging is our in-room dining, minibar. What’s led the way in terms of percentage change—not dollar change, but percentage change—are things like service charges and AV rental, things that really can’t be negotiated by management… Then when you get down to the other operating departments, not unexpectedly, telecommunications, guest laundry and movie rental are all still down. But we’ve seen pick up in things like retail, parking and spa. So there is growth in some of those other revenue sources.”

The most important aspect to consider when weighing potential new revenue streams is knowledge—knowledge of your market, knowledge of your brand and the identity you want to embody, and knowledge of your guests and what they’re looking for. “We basically challenged all of our general managers: You’ve got to come up with the story; what is the experience and what are the assets you have?” said Richard Jones, SVP/COO, Hospitality Ventures Management Group. “You may not have the ability to do the rooftop bar and the salon in the center of the lobby, but you can drive revenue, loyalty and reputation in your local market by creating and telling your story, and defining and differentiating yourself from the competition. That is a compelling revenue opportunity over time because as competition heats up, people do want that experience.”

Jones noted that this has been more challenging for branded hotel operators, so his company created a workshop agenda in which corporate team members go to each hotel to lead them through a brainstorming process. “We believe that is going to be a driver of market share, and there’s going to be a direct return on revenue as a result,” he said.

Chip Ohlsson, EVP/chief development officer, N.A., Wyndham Hotel Group, agreed with Jones’ assessment, noting that differentiation—by way of the local market—is key. “We’re actually going back to when hotels were part of the fabric of the community. They were the place to go when you needed a quick meal or you wanted to know what’s happening in the community. At some point, we became homogenized and that’s not what we are. We’re in the hospitality business,” he said.

One of the best ways to monetize the hotel, he said, is to train employees to give the best experience. “If I go to the front desk and say, ‘Where’s a great place to go?’ And they say, ‘McDonald’s up the road,’ that’s not an experience I want,” he said. “But if they say there’s a great secret place that serves the best pizza, that’s something you can monetize, too… At some point, we started thinking inside the box, but we’re in hospitality and there should never be a box in hospitality. Leave that for the accountants. Let them live in that world. Let us get creative, go back to what we did best, and start driving the revenue the best way we know how, which is being woven in the community, not just being in the community.”

When queried whether hotels should be guiding guests toward the hotel’s F&B—versus that local pizza place—Ohlsson replied, “Your first duty should be to the guest and providing the great service. You need to upsell and there’s an opportunity to do that, but you need to read that guest. If they’re ready to go out, keeping them in to go to the local coffee kiosk may not be the best opportunity. In the morning, that’s the best opportunity to do that. Understand the habits of your guest and what they’re looking for—when I’m there spending a lot of money at that hotel, I expect the service first and then you can upsell me later.”

“What is really critical about that though is understanding what tier your property sits in,” said Kathleen Chiechi Flores, EVP, brands and innovation, Trump Hotel Group. “We have to actually define what we’re doing, where we’re doing it, instead of trying to capture coffee in every tier, perhaps… It’s defining what you are instead of trying to be everything.”

For his part, Robert “Bob” Habeeb, president/CEO, First Hospitality Group Inc., noted that the lines have been blurred. “We talk about staying in your lane, but really, the problem is that the white stripes down the middle of the road have been painted over,” he said. “There’s a homogenization of hotel product up and down the chain segments, and a lot of the positioning today is driven by things that aren’t traditionally associated with that brand. We’ve got a Hilton Garden in downtown Louisville, which is right off the entertainment district, and we put a hoppin’ restaurant rooftop bar there and it kills it. It’s a big local draw.”

Amy A. Hulbert, managing director, design, Best Western Hotels & Resorts, added that hotels also need to evaluate their skillset. “One of our new Vib hotels, we have a great developer—he has seven of our hotels, but this is his first of a lifestyle brand,” she said, adding that he recognized that F&B is out of his wheelhouse. “So they found this great food truck operator who is going to park the truck in the parking lot during high periods, and they’re also going to provide all of the food in the grab-and-go area. He knew he had a need for something he couldn’t provide the right way and he knew he had to outsource this and get that product this customer is looking for.”

In terms of revenue generation, F&B outlets are back in a big way, according to the panelists. “We’re talking about revenue generators—beverage is back with a vengeance,” Habeeb said. “We went through a period in this country where we almost had a second Prohibition going on. Maybe we credit our friends at Uber with helping us get back on a more normalized path. Beverage is where we’ve focused a lot of our energies—driving great programs in our hotels. We’ve done three rooftop bars and have four more in the process—great margins, very socially acceptable, makes the hotel stand out. Those are the kinds of things that people are buying into now.”

Jay Stein, CEO, Dream Hotel Group, agreed, pointing to his company’s involvement with the Todd English Food Hall at The Plaza. “We weren’t involved in it from day one, but we’ve been running it for about five years… The great thing is it brings in tourists and real New Yorkers too. It’s a great place where you’re able to create value, create buzz,” he said. “It’s not the typical amenity you would see in a five-star luxury hotel; a lot of luxury properties are just so put off to the average person that they don’t think they belong there. That’s why so much of the F&B stinks in five-star hotels—not the food, but there’s very little energy in a lot of them. To blend these kinds of things in high-end hotels is not easy to do.”

Speaking from a designer’s perspective, Bob Neal, principal, Cooper Carry, noted that his firm created a restaurant design group several years ago, in part because of the resurgence in F&B. “We saw there was an opportunity in the industry—you weren’t getting the energy. You were getting a dining room. We thought it was important to hire people who understand what a food & beverage operation is, they know who chefs are, how menus work, how you cook the food, how you bring it to the table. It’s been very successful,” he said.

Neal noted that lobbies are being redefined, many without registration desks and many that put a focus on the lobby bar. “The way we approach it is we see every seat in the lobby as a revenue seat. Why put seats there for people to sit in? Put seats there for people to sit in and buy something,” he said.

“You have to design, not decorate, and there’s a big difference,” Ohlsson added. “Design lasts forever. Design drives dollars; decorating does not. If you could put in a great design and spend the money upfront to do it, you’ll be successful.”

Looking toward the future, the panelists agreed that meetings will create more revenue opportunities for hotels. Kelly McCourt, director of sales & marketing, The Darcy Washington, DC, Curio Collection by Hilton, which is part of Sage Hospitality’s portfolio, pointed to WeWork and other coworking spaces. “That concept, there’s something to that, having a space that you can come in and reserve by the hour,” she said.

Meredith Latham, head of Crowne Plaza, IHG, noted that Crowne Plaza is incorporating more spaces for meetings revenue in the lobby. “What we have been piloting throughout this year is so exciting. It’s about utilizing the unused, latent space in the lobby and transitioning that to something that helps keep the guests interested to stay around,” she said. “It’s a holistic offering for our guest where they have great F&B, excellent service, a marketplace with healthy food offerings, but then we also have technology-enabled solutions everywhere—iPads where guests can order cappuccinos or a round of beers for all of their colleagues; that is definitely keeping our guest in the lobby area a lot longer.

“We’ve sub-segmented small portions of the lobby into small studios, so they have a seating area with technology ability and then a miniature conference table, so you can house six to 10 people in one space,” she continued. “We actually rent it by the hour and what we’re finding is when guests come for large meetings or one with a client, they’re renting this space for half days and full days. It’s a differentiator. Ninety-five percent of our guests say this is something that will help them choose Crowne Plaza over a competitor, so we know we’re on to something really big.”

Sean Hennessey, CEO, Lodging Advisors LLC, noted that it’s clear that technology—like that which Crowne Plaza is deploying—will drive incremental revenue in the future. “Technology helps guests spend money in the lobby, at the pool, on the beach, in all areas of the hotel; you always want the ability to have it be within arms reach of desire to be able to get a drink or a coffee,” he said.

One way hotels can really add value is though local partnerships. “There’s a really great revenue stream through partnerships, really meaningful partnerships that feel like they’re an extension of the brand and part of the DNA of what the hotel is about,” McCourt said. “When I help build programming for a hotel, I look at what is cool and in the zeitgeist of what’s going on… To me, you can take this concept, go very granular and create meaningful relationships that really extend from the brand and embrace a strong story and connection with guests that make them come back, and make a really strong social element to it as well.”

“Just to add on to that, we keep hearing conversations around community, and how we’re going to bring the community in, and I think that’s the biggest thing we’re seeing,” Flores added. “These spaces we have now, and the way we’re approaching design, is so different than the experience of hotels gone by. I’m excited about how we continue to engage local communities to drive local-community revenue and not just focus on the traveler.”

Stein added that all hotels have a local authenticity. “Every area has something, and even if you’re an airport hotel that may not be sitting in the middle of what you have, you’re close to what you have,” he said. You used to think it’s New York, L.A., San Francisco… It’s not coast-centric anymore, and every place has something.”

When evaluating new revenue streams, Mandelbaum queried whether revenue increases flowed through to profit increases. “Driving revenue is great, but driving profits is better,” he said. “The good news I hear is things are very creative in areas like food & beverage, which is highly profitable, taking advantage of unused space, which is profitable, outsourcing and receiving that commission, which can potentially be more profitable than operating it yourself. I’m wondering: Are these new concepts just driving revenue or driving the profit as well?”

“When we look at how we program, we are taking the margins into account,” Flores said. “Everybody has limited resources in terms of both humans and dollars, so when we are programming and looking holistically at the experience, there are myriad things you could put into a property, but ultimately, what you’re looking for are the high-margin initiatives.”

“Additional revenues are important but, ultimately, if it can add 1% to occupancy or the $10 on your rate, we know that’s where the money is,” van Wees said, noting that Mandelbaum is right that these additional revenue streams also have expenses to them.

Stein agreed that the boost from these revenue streams also translates to a boost in ADR. “What we found early on was that if we create these [experiences]…it helps the ADR,” he said, noting that it can also help increase review scores. “If I’m the first, or second or third choice out of 20, or 50 or 300 hotels, that gives me that extra ADR. I can get $10, $15, in some cases $50, $60, $80, multiplied by 200 rooms, 80% occupancy, 365 days a year—that’s $2.5 million that flows through with no expense to it. If I can get that ADR premium because I’m the preferred hotel, or one of the preferred, that’s huge.”

And, Hulbert noted, no matter what incremental revenue streams there are, rooms are still important. “Upselling the rooms is really key. That’s one of the commodities we know we always have,” she said. “We can talk about layering on all of these things and that can add some incremental revenue, but if we can get more money for guestrooms and provide more value, that’s really what we’re in business for.”

For his part, Neal noted, “I think you’re starting to create experiences, and experiences don’t necessarily cost a lot of money to create. For a long time, with the possible exception of resorts, amenities were available to guests for them to do something while they stayed at your hotel in hotel rooms. If you create experiences, then, perhaps, guests are coming for the experience, and the rooms are there to help people stay for the experience, as opposed to the other way around… It’s all about trying to create something and to differentiate yourself from somebody else.”

One area where hotels need to be careful—destination resort fees and its sister stream, the more-recent urban amenity fee. While these fees can be a good way to add revenue, unless the services offered also add value, guests are likely to feel like they’re being nickel-and-dimed.

“I think resort fees are a hotelier’s cocaine,” van Wees said. “Once you’re on it, you can’t get off it, because you build it into your P&L; suddenly it’s a $2-million revenue stream, and you can’t take it away.”

“If you create a compelling offering, people do not push away from paying this extra fee,” McCourt said.

Habeeb noted that the Obama administration had warned hoteliers it was looking into resort fees, something the Trump administration has backed off of. Still, he noted, “It’s inevitable that consumers are going to push back if these fees don’t represent something that they find value in. It’s a great idea to have packages people can buy into and enhance their experience, but you’re on slippery ground when you start talking about charging a fee for things people perceive should be part of what they paid for in the first place.”

The key, Stein said, is to not add the amenity fees in a way that guests feel are deceitful. “We’re looking to do it in a way that people feel good about it, as opposed to saying, ‘You guys are just ripping us off,’” he said.

“That’s the key,” Jones said. “It’s a good time in the business, demand is high, and when the market is high, there’s a good opportunity to do that. I’ve been subjected to them and have personally felt it was a nickel-and-dime play, taking advantage of the fact that it was there and they can, so they did.” He added that this is different if the hotel can point to tangible value.

Creating tangible value is critical in all revenue streams. Neal pointed to The Spectator Hotel in Charleston, SC. “The minibar food is free as part of your fee,” he said, noting that the minibar offers items from local partners. “As a consumer, you feel like you’re getting something for free. You’re not, but you feel you are. That’s when your whole attitude about the hotel changes.”

Ohlsson pointed to the new Mercedes-Benz Stadium, home of the Atlanta Falcons. “They decided to do all concessions at a reasonable price because the take rate is better,” he said. “What the NFL learned was we keep charging $20 for a beer because that guy did it. Atlanta said we’re going to charge $5 for a beer because we’ll sell twice as many beers and we’ll be known as the friendly stadium. And here we are, talking about it. They got people to go, and they sold more tickets, which is what the job was: to put the best product on the field… If we get back to providing the hospitality that we were meant to do, I think you’ll find better take rates and you’ll have bigger profit margins—and you can buy more in bulk.”

“We have to wake up as an industry because the big revenue streams 20 years ago—calling home, ordering movies and the $50 cheeseburger—the first two are already gone, and last night I settled into my room and wanted something to eat and I thought, ‘My options tonight are a $50 cheeseburger or DoorDash to find a great local restaurant that delivers,’” Habeeb said. “That’s where consumers are going to go. We need to embrace it and be there. Consumers aren’t lacking for choice anymore. That’s our new reality; we just have to adjust to it.”

Hulbert added that hotels need to be unobtrusive when it comes to selling, as well, pointing to a hotel she stayed in that had a pillow menu. “I slept with a lavender pillow that I now own in my house through them because it was such a great experience. It wasn’t pushed. It wasn’t something I felt pressured to do,” she said. “I worked in a hotel in Chicago where we put some great things in our executive rooms; we had a great showerhead, some great features and we sold all of that in the gift shop.”

“People don’t want to be sold to; they want choices,” McCourt agreed.

“Isn’t that what’s next in our industry? Deconstructed pricing?” Habeeb asked. “Airlines have mastered this: Your ticket is the cost of entry and, after that, it’s how much leg room? Do you want to bring clothes with you? We now have the technology where guests can scroll over every room and might buy a corner room, or might be willing to sleep by an elevator for less money.”

“It comes down to knowing who your customer is and why they’re there,” Jones said. “What is the purpose of their trip and what are those things they value? You can get to the deconstructed pricing or the airline model, but hopefully, we’ll be better at it and a little smarter about it. It’s all how you sell and how you present it… We all hate buying through the airlines. I don’t think we’ll get there. Hopefully, we’re better than that.”

“If you set the right expectations, you’re OK to do it,” Ohlsson said, noting that people who buy flights through Spirit understand what they’re buying. “Set the expectations. Do it right up front.”

“When we compare to the airline industry, we’re a different industry,” van Wees said. “This is about offering a place of refuge, of safety. Whatever you do needs to be meaningful and in the spirit of what’s important to the guest.” HB